Federal Reserve's Fisher: Reorganize Banks That Are 'Too Big To Fail'

Regulators should reorganize the country's largest banks to protect against the risk of institutions that are "too big to fail" and that would saddle ordinary Americans with the cost of another bailout.

WASHINGTON -- U.S. authorities should
reorganize the country's largest banks to protect against the
risk of institutions that are "too big to fail" and that would
saddle ordinary Americans with the cost of a bailout the next
time they get in trouble, a senior Federal Reserve official said
on Wednesday.

"We recommend that TBTF (too-big-to-fail) financial
institutions be restructured into multiple business entities,"
Richard Fisher, president of the Dallas Federal Reserve Bank,
told an audience at the National Press Club in Washington.

He declined to answer questions directly on monetary policy
during a question-and-answer session after the speech with
reporters, but acknowledged that he believed the impact of
massive Fed bond purchases on monetary policy was fading.

Lawmakers passed sweeping changes to financial regulation in
the aftermath of the 2008-2009 financial crisis in legislation
led by Senator Chris Dodd and Representative Barney Frank.

Fed Governor Daniel Tarullo in October suggested capping the
size of banks according to their proportion of U.S. gross
domestic product and said that would require Congress to write
new laws. But Fisher did not think dictating how big banks could
grow was the right course.

"I'm a little reluctant just given my philosophical bent to
artificially engineer size," he said, arguing that markets would
do a better job of making that judgment.

The outspoken Texan policymaker, blaming such "behemoth"
firms for massive bad bets on the U.S. housing market at the
root of the crisis and subsequent taxpayer bank bailout, said
the Fed should protect their core commercial lending operations
-- and nothing else.

He identified 12 "megabanks" with assets of over $250
billion as too big to fail.

"Only the resulting downsized commercial banking operations,
and not shadow banking affiliates or the parent company, would
benefit from the safety net of federal deposit insurance and
access to the Federal Reserve's discount window," Fisher said.

The discount window is an emergency source of liquidity for
qualifying banks unwilling or unable to borrow in the open
market. They pay a higher rate of interest for the privilege.

The remaining parts of a bank's business would be excluded
from government support, and anyone doing business with them
should have to sign an official disclaimer, Fisher said.

Such a health warning would acknowledge that no federal
deposit insurance or other public money would come to the rescue
if their counterparty hit the rocks.

'MEGABANKS'

The 12 "megabanks" Fisher identified together account for 69
percent of all U.S. banking assets, but represent only 0.2
percent of the country's 5,600 banks.

"The 12 institutions ... are candidates to be considered
TBTF because of the threat they could pose to the financial
system and the economy should one or more of them get into
trouble," he said.

He did not name them all, but showed a slide displaying the
names of five top U.S. banks: JPMorgan Chase, Bank of
America, Goldman Sachs, Citigroup and
Morgan Stanley.

Fisher said he had received support from lawmakers on both
sides of the aisle for his views, which the Dallas Fed has been
pressing for over a year, and had even heard from famed
dealmaker Sandy Weill, who said he agreed with Fisher.

Weill, a former chairman of Citigroup, built the Travelers
Group insurance company into a financial services giant in a $70
billion merger with Citicorp in 1998.

"I'm still scratching my head," about Weill's approval,
Fisher said.

By contrast, the country's 5,500 community banks with assets
under $10 billion and the 70-or-so larger regional banks, with
assets of $10 billion to $250 billion, pose no such threat,
Fisher said, and had been shut by regulators in the past when in
trouble.

Arguing that firms deemed too big to fail enjoy a "perverse"
subsidy because creditors were prepared to lend them money at a
lower rate than smaller, better-regulated and less risky firms,
Fisher said the situation had worsened since the crisis.

He acknowledged that big banks - which give generously to
U.S. lawmakers of both parties and have well-funded lobby
machines in Washington - would likely not reorganize themselves
voluntarily, and he envisaged federal action.

"A subsidy once given is nearly impossible to take away,"
Fisher said. "Thus, it appears we may need a push, using as
little government intervention as possible to realign
incentives, re-establish a competitive landscape and level the
playing field."

It wasn't all bad luck for the capital markets this week: Hedge funds had a decent first quarter despite a slowdown in jobs numbers, BlackRock might be heading into new territory as hedge fund managers take a hard look at their counterparties, and the head of the IMF didn't pull any punches when assessing today's global economy. At least we can admire the nice weather and some of the best quotes of the week.